On the Other Side of the Cliff

Even with a positive resolution of the fiscal cliff (and you can fill in ‘positive’ any way you like) awaiting us on the other side is the still highly elevated unemployment rate.

How high and for how long?

The figure below shows a bunch of forecasts of the jobless rate over the next few years, along with the CBO estimate of the full employment unemployment rate as a reference point.

The most pessimistic trend is the other CBO line, as that assumes we go over and stay over the cliff. The most optimistic is Moody’s.com. Their model foresees faster growth in coming years than the others, in part because they believe the rate of household formation (and the related higher investment and consumption) will soon accelerate after being suppressed by the housing bust and Great Recession.

Goldman Sachs researchers expect real GDP growth to be about 3% in 2014-15 (Moody’s expects about 4%). My own forecast (JB) is similar to GS but a bit more pessimistic because I assume the labor force participation grows more quickly as the economy recovers, putting upward pressure on the jobless rate.

At any rate, relative to full employment, we’re looking at elevated unemployment for years to come. Of course, were we to tack from austerity economics to the Keynesian variety, we could do better than this. As it stands, virtually every cliff outcome invokes considerable fiscal contraction next year; a reasonable guess, assuming an agreement, is between 1-1.5% of GDP, with the loss of the payroll tax cut alone accounting for most of that.

That’s what’s waiting for us once we get over the cliff. In fact, it’s been here all along.

3 comments in reply to "On the Other Side of the Cliff"

The good news is that in all these predictions we will be reaching full employment just in time for the 2016 election. The Democrats can take credit for it–and blame the Republicans for it taking so long.

What I’d love to see is a spreadsheet that allows one to adjust the CBO projections for our national debt by simply changing the projected average real GDP estimate. BEA data show that the average real annual GDP growth was 3.875% during the Clinton years and 2.0375% during the GW Bush years. I suspect that using the Clinton years GDP figure for the future would make it look like we don’t really have a debt problem, we have a growth problem, and could be used to focus our policies more to growth encouragement rather than debt reduction.